Why Lease a Car Vs. Purchasing It?

You've had your eye on that car for a long time. You have studied it specs, meticulously researched the pros and cons and done everything to ensure it is the right car for you. Now it's time to walk in the dealership and talk to the salesman about buying it. But he throws something at you that you didn't think of -- you have the option of buying it outright or leasing it for a few years. You're leaning towards leasing it, but don't know if it's better than buying. Take your time. The car will be there tomorrow, but this decision will impact you for years to come.

Pro: It's Only a Few Years

Even if you researched the car extensively, took it for a test drive and liked the way it looks, you may realize after a while that it just isn't the right car. Well, you won't have to hang on to the car forever. Lease terms are typically anywhere from 36 months to 60 months --- three to five years. Leasing is a viable option for those who may get bored with their cars after a few years or those who may be planning to start a family in a few years and know a two-door sports car won't suit their needs down the road.

Pro: Short-Term Price

Leasing is an excellent way to drive that car you'd never be able to buy. For a few years, you can afford to dive that high-end car only more wealthy people can usually afford. Or, maybe you just don't have the money to buy the car. The price of leasing a car for a few years can be less expensive than buying the car outright, which makes it more appealing.

Con: Long-Term price

Over the long-term, the price of leasing cars can be quite expensive. If you are constantly leasing cars, you will have paid more money than actually buying the car over, say, six or seven years, depending on the cars you are leasing. For example, a car that would cost $16,000 to buy would cost $325 per month to lease for three years. With a down payment of $2,000, you would pay $11,700. But after the term, you would have to lease another car and perhaps spend the same amount of money on the second car. So over six years, you've paid over $23,000 for a car that probably would have lasted six years and been cheaper to buy. You may also have the option to buy the car after the lease is up, but the combined costs will likely be more than if you bought the car in the first place.

Con: It's Not Yours

If you bought the car, it's yours. At the end of the leasing term, you are left with nothing. And when you own your own car, you can do what you please to it, be it bumper stickers or a new car stereo, or ignore that crack in the windshield. If you lease the car, you may be restricted from altering the vehicle. You may also owe extra money for any damage to the car, be it a dent in the door or that cracked windshield.

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How Can I Refinance My Toyota?

Refinancing your Toyota vehicle can save you money if you are able to qualify for a lower interest rate. Banks and other third-party lenders typically offer lower interest rates than what Toyota dealers offer through their own financing program. Through an auto refinance loan, you might be able to either lower your monthly payment or possibly pay off your loan amount sooner. There are other benefits of an auto refinance, such as the ability to extend your payment terms, add or remove a co-signer and even skip a few payments.

Instructions

1

Determine if your vehicle qualifies for auto refinancing. Certain lenders have restrictions depending on the type of vehicle (new, used), the mileage on the vehicle, the current market value of the vehicle and a minimum loan amount. If your vehicle does not qualify with one lender, try another lender or contact companies such LendingTree, RateGenius or Bankrate, which provide quotes from multiple lenders.

2

Review your credit file for any inaccuracies or negative items. Such items affect your credit scores and, in turn, can affect the interest rate on the auto refinance loan and your chances of getting approved. Dispute any erroneous information on your credit report with the three credit bureaus.

3

Contact local banks and credit unions to ask about their auto refinance programs. Compare different lenders before applying for the loan to get the best deal possible. Each lender will have different approval guidelines, and certain lenders might offer special perks.

4

Submit the auto refinance application and necessary documentation with a select lender. Wait for the approval from the lender.

5

Close on the loan and make sure your vehicle's title is updated with the new lien holder and is forwarded to your new lender. The lender will hold onto the title until all payments toward the loan have been made.

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How Does Repossession Affect My Credit Rating?

Falling behind on your car loan serves as a notice to the lender that you're in trouble financially. Most lenders will wait---either by law or by choice---before repossessing your vehicle. If you cannot begin paying on your loan, the lender will repossess your car. An auto repossession will have numerous negative effects on your credit report, and will prevent you from obtaining another auto loan for at least six months.

When Repossessions Occur

Most states stipulate that lenders must wait until a person is two months past due before attempting to repossess the person's vehicle. Although the lender has the legal right to repossess your car after two months, most elect to attempt to recover the funds before resorting to repossession. If they deem that fund collection is unlikely, they must repossess your vehicle in attempt to reclaim the money lost on the loan.

Future Auto Purchases

Auto loan lenders take a long look at your credit score before approving you for a loan. Having a negative mark, such as a late payment, doesn't necessarily mean the lender will deny you the loan. However, lenders look at repossessed cars in an entirely different manner than a typical late payment. Most lenders will refuse you for an auto loan after repossession. Regardless if you have a large down payment or a co-signer, most lenders will simply not risk taking you on immediately after repossession. Carsdirect.com suggests waiting one to two years after repossession before applying for another auto loan.

Seven Years

The history of a car repossession will stay on your credit report for seven years. The only way you can remove repossession from your credit report before it is automatically removed is by contesting the repossession. If you believe the lender made a mistake in repossessing your car, you can challenge the lender to show proof that your loan is delinquent. The good news is that repossessions have a diminishing effect; the older a repossession report, the less effect it can have on your credit, according to Experian. After seven years, your credit report will show no history of the repossession.

Late Payments

The negative effect of repossession is often compounded by late payments. Since repossession means that you were at least 30-days late on your loan, the lender probably reported you to the three major credit bureaus for a 30-day late payment. A 30-day late payment has far less repercussions than repossession, but it still shows up as a negative report in your credit report.

Interest Rates

When your credit score goes down, lenders, especially credit card companies, may choose to increase your interest rate. A lender may not subject you to a rate increase for a 30-day late payment, but they almost certainly will if you lose your car to repossession. The interest rate applies to any existing and future outstanding balances.

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Auto Loans for People With Little Credit History

Your credit score depends on several factors, and one of those factors is how long you have had credit. According to FICO, an organization that tracks credit scoring, at least 15 percent of your score depends on the length of your credit history. If you have a short credit history, though, you do have options for auto loans.

Co-signer

When you use a co-signer, the lender can use the co-signer's credit to make a decision on your loan. If you are unable to make your auto loan payments, the co-signer would be held accountable. This option has drawbacks, however. If you always use a co-signer, your credit will not grow as quickly. Using a co-signer on only your first auto loan can help you build your credit to the point where you can obtain your next loan without a co-signer or refinance the current loan on your own.

Large Down Payment

Place 20 percent down on your new car. If you default, you will not recover this sum, making the loan riskier for you but less risky for the lender. By making a loan less risky to the lender, you can persuade that lender to extend your loan despite your short credit history.

Collateral

You have the option of using additional collateral on your auto loan. For example, you can use stock certificates, a savings account or home equity to obtain a loan for an automobile. Most auto loans are secured with the car itself; if you default, the lender seizes the car. By adding additional collateral, you give the lender the option of seizing more assets in the case of your default. This makes the loan less risky for the lender. However, this is additional risk on your part, and you should not enter this type of agreement lightly.

Seek High-Risk Lenders

Banks tend to be the most traditional lenders; this means they steer from very high-risk loans due to regulatory guidelines. Lenders outside of these standards can be more lax. Car dealers often have additional incentive to issue loans because they would like to profit on the sale of the vehicle. If your car dealer will not finance you, though, you still have more options. You can seek no-credit loans. Lenders offering these options engage in high-risk debts in order to charge higher interest and fees. While these loans are more costly, they can give you options when traditional financing will not work.

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What Are Loan Terms for Used Cars?

Buying a used car over a new car can save you money -- the Edmunds websites states that new cars depreciate about 20 percent once driven off the dealer's lot. Used-car loans also come with an interest rate, which is the amount the bank charges for lending you money. Zero-percent interest rates are usually advertised for new-car loans, not used.

Term Options

Vehicle loans are available for a period of 24 months to 84 months. Obtaining a seven-year loan for a used car is uncommon, but if you are purchasing a high-priced item, at least $25,000 or more in most cases, you may find the term is an option. The lender usually has guidelines in place, such as price or credit requirements, to qualify borrowers for an 84-month loan. Some banks do not offer an 84-month term.

In addition, credit can affect loan term options. For example, someone with poor credit might be restricted to a lower loan term because, if the bank has to repossess the car, it wants to make sure it does not lose a significant amount of money. A poor credit borrower might also have a higher interest rate, up to 29 percent in some states. This can affect a borrower's budget and options significantly.

Rates

The term of the loan you establish will affect your interest rates. Rates up to 60 months are favorably advertised because they are the lowest and most competitive. For used-car loans over 60 months, expect to see an increase in the lowest qualifying rate. For example, if the best rates you can find are 5.9 percent, you are likely to see a one-point increase for 72 months and another point increase for 84 months.

Loan to Value Ratios

All used car lenders follow their own value and lending guidelines. The guidelines usually don't allow you to borrow more than the vehicle's value, however, the lending ratio compared to value depends on your credit in addition to the vehicle you want to purchase. For example, you cannot take out a five-year loan on a 10-year-old vehicle with 100,000 miles on it. A loan-to-value ratio considers the amount you want to borrow in comparison to the vehicle's bank-determined worth. Newer vehicles with lesser mileage warrant a longer loan terms.

Someone with excellent credit is often afforded a higher loan-to-value ratio. For example, someone with excellent credit may borrow 120 percent of the vehicle's bank-determined worth, while someone with poor credit may only borrow 60 percent of the vehicle's value, meaning the borrower has to put down a good amount of money.

Lenders

A variety of used car loan providers exist. On a local level, you should find various banks, from credit unions to national chains, such as HSBC or Bank of America, which exist in many towns throughout the United States. Subprime lenders, which lend to risky buyers at high interest rates, exist both locally and nationally, meaning you can apply online even if a branch does not exist in your area. Dealerships can also handle used car loans because they often work with a number of banks. The lender you decide on can affect your loan term and interest rate, as bank lending guidelines differ.

Considerations

The term of your loan paired with interest rate can greatly impact the amount you pay back over time. In addition, a longer term will decrease your equity amount. For example, if you are making a minimum payment over a long term loan, such as 72 months, your car may depreciate faster than you make payments. Before deciding on a term, consider rates and overall payback costs. You can enter in your loan amount into an auto loan calculator and change the terms to view your overall payback amount over time. The Edmunds website offers an auto loan calculator that's free to use.

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The Average Interest Rates on Auto Loans

According to the Federal Reserve, the average interest rate for a four-year car loan from a commercial bank was 5.87 percent in November 2010. At the big auto finance companies, that average interest rate was 4.63 percent. Borrowers typically financed about $27,000.

Brief History of Auto Finance

Rates at the auto finance companies fell considerably during the U.S. financial crisis in 2008 and 2009. In the fourth quarter of 2009, rates stood at 3.47 percent. That was a pretty marked decline. In 2005, rates averaged about 6 percent. They fell fairly quickly to 4.99 percent in 2006.

Bank Rates

Rates at commercial banks have traditionally been higher than those at auto finance companies. When rates were at their lowest at the auto finance companies, commercial banks lent at an average of 6.55 percent. That's more than 3 percentage points higher.

By City

According to HSH Associates, a firm that compiles mortgage and lending data, average rates in the U.S. vary according to the city. For a $20,000 loan made to a borrower with good credit in December 2010, the average rate in Los Angeles was 6.9 percent. In Cleveland, it was 4.7 percent. Other cities hovered between the two.

Your Credit Score

Averages are computed by combining the high rates and the low rates. Not everyone gets the typical rates, or even a good rate. The rate you receive may be based on your credit score. You should shop around to find not only the best rate, but the best deal on credit. A high interest rate with a shorter term may mean that you end up paying more per month, but with a shorter number of months. A lower interest rate offered over more than five years may end up costing more money in the long run. Examine the truth-in-lending statement your lender offers to determine the true cost of credit.

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What Are the Benefits of Used Car Leasing?

Leasing a vehicle instead of taking out an auto loan gives drivers the opportunity to drive a new car with less expensive payments. While most consumers associate leasing with new cars, used car leases are also available for those who would rather avoid leasing a brand-new car. Used car leasing offers several benefits that can make getting a different car a more pleasant experience.

Total Lease Payments

The total lease payments on a used car are much lower than those on a comparable new car. This is because cars depreciate the most during the first model year. When you lease a vehicle, you are paying for the amount the car depreciates in value during the time you drive it, so the biggest chunk of depreciation has already occurred when you lease a vehicle that is at least 1 year old.

Fewer Recall Notices

After a vehicle manufacturer releases a new model year, it collects information to evaluate the quality and performance of its vehicles. When it receives information about a defect or safety issue, it sends out recall notices so that the vehicle owners or lessees can have the problems fixed. When you lease a used vehicle, some of these defects and safety issues will have already been taken care of. This means you spend more time driving your vehicle and less time in the dealership's repair shop.

Less Stringent Credit Requirements

Because a used vehicle is less valuable than a new car, some leasing companies are willing to approve lease agreements for customers with less than perfect credit. A few are even willing to lease vehicles to customers without a credit check at all. This gives credit challenged drivers the opportunity to lease a late model vehicle. It also gives them the opportunity to rebuild their credit by making timely payments.

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